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JKX Oil & Gas - Cut Losses

JKX Oil & Gas (LSE:JKX) has had a disappointing last 5 months with share price movement failing to create any positive movement and a relative lack of news for support. The result has been a ~12% decline on the initial review price to 70.5p/share with the market cap falling to £121m. Whilst the company did initally look set to establish an uptrend, this failed at an important hurdle and with the results today sending the shares down a further 7% it looks time to cut losses.

The chart position for JKX is very weak and it an important reason as to why I am changing my position on JKX to neutral. A combination of the share price having previously declined by 30% combined with the failed break of 80p gives me sufficient confidence to say that the downside risk now outweighs the upside risk (in the short-term). Consequently, lower levels are likely to be re-tested especially considering that there is no real game-changing news on the immediate horizon. The technical indicators are largely bearish so taking an 11% loss here should be a safe and strategic move.

Several news statements have been released since the initial review. The first of these revolved around sorting out the financial position of the company. It was announced to the market that $40m worth of convertible loans were to be issued to provide working capital for upgrading facilities at their Russian and Ukrainian operations and to help repay existing debt obligations. This process was completed in late January. This news helped dampen sentiment around JKX. The bonds had an 8% coupon interest which will likely keep sentiment weak as the bonds will not likely be repaid in the short or medium terms. The maturity for the bonds is 5 years.
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courtesy of skhakirov on flickr

Operational updates included the results of a successful acidisation test, an upgrade to reserves at a project in Ukraine and progress from a multi-stage fraccing operation also in Ukraine. These announcements helped the share price recover from the pre-set lows, but ultimately they failed in providing a platform for sustainable growth (which is 80p). Without this the share is likely to drift lower towards a market capitalisation of £100m. Despite this, rather than thinking that JKX is a sell, a neutral rating would be more appropriate considering the producing assets the company has.

Further operational updates were released, but the news within them was minimal - perhaps the company would benefit from writing lengthier RNSs. The flow of information from the company to shareholders (most of the year round) is somewhat restricted, which has led to uncertainty and is likely to have fuelled the selling by some investors. Igor Kolomoisky of Ralkon Commercial has also completed the disposed of a substantial shareholding over the period. In March another substantial shareholder tried to request an Extraordinary General Meeting (EGM) to try and remove two directors (including the CEO) and replace them with three pre-proposed directors. Whilst this will not occur, it certainly is disconcerting for shareholders.﻿﻿

Perhaps the most important news was released today - this is what swung me towards changing my opinion here from buy to neutral. The key points are outlined below:

- Group revenue fell by 14% to $202.9m as a result of a continued decline in production rates. This was somewhat offset by stronger hydrocarbon prices
- Group production fell to 8281 boepd from 9045boepd (Although a 10000boepd target has been cited by the company, production is moving in the wrong direction)
- The company slipped to a Full-year loss of $11.3m compared to a $59m profit the prior year. This is important because this loss was achieved on lower CAPEX of $67.3m. With plans to improve production materially, CAPEX will undoubtedly increase
- In Ukraine tax rates on gas have increased by around 50%. Two newly introduced rates in Russia (Mineral Extraction and Production taxes) are also set to increase significantly in coming years to help support the domestic government's finances
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courtesy of freedigitalphotos.com

- Residual cash at the end of 2012 stood at $12m (pre-bond placing)
- Trade and payables stood at $33m which is concerning considering these will have to be paid off. Furthermore non-current tax liabilities increased to $16m

CEO Paul Davies commented: "2012 was a challenging year for the Company as we managed both production delays in Russia and reduced liquidity resulting from retirement of short-term debt. Commercial gas sales at our Russian plant commenced in April 2012 and current production rates are in excess of 40 MMcfd. We have continued to benefit from strong and stable oil, condensate, gas and LPG realisations in Ukraine. The Company's development programmes in both Ukraine and Russia are now fully-funded following the successful placing of $40million of convertible bonds in January of this year. We have begun an important growth phase of the Company with a reversal of the recent production decline in Ukraine and the continued growth of our new Russian production."Clearly there are issues that have been made clearer by the full year results and there are ultimately whilst fundamental potential exists, the risks here including a poor chart position and no firm calendar for the future is likely to prevent the shares making any meaningful progress. This was reflected in today's share price decline. The result of this is that JKX has been transferred from my buy opinion to a neutral opinion. The risks currently outweigh the rather unclear rewards. Cut losses.

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